Mexico: risks to growth in 2026 but good long-term potential

Mexico is the second largest latin American economy (after Brazil) but still has a much lower income level than its northern neighbour, the United States. At market exchange rates, the Mexican economy is only around 6% of the size of the US economy, while GDP per head measured at purchasing power parity is about 29% of the US level. This highlights both the scale of the development gap and the long-term potential for economic catch-up if productivity and investment improve.

Demographically, Mexico is in a relatively favourable position compared with many advanced economies. The United Nations forecasts continued population growth over the next 25 years, while the proportion of the population in the key working-age bracket of 15 to 64 years old is expected to remain close to two thirds. This provides an important support for term growth, particularly compared to many developed countries which are facing ageing populations and shrinking workforces.

Inflation and interest rates

Inflation remains an important challenge. Mexico has an inflation target of 3% +/-1%. At 3.9% in May, inflation is just within that range, but services price inflation remains elevated (4.8%). Broad money growth has slowed a little but is still too high, further heightening concerns about future inflation. The policy interest rate was cut to 6.5% in May but the central bank has indicated the easing cycle has ended, given concerns about underlying inflation.

Growth

Economic growth has become more uncertain. GDP rebounded during the final quarter of 2025, helping full-year growth reach 0.6%, comfortably above the Bank of Mexico’s earlier forecast of 0.3%. However, prospects for 2026 are clouded by several risks: the uncertainty of US tariff policy and the future of USMCA (formerly NAFTA); political and social tensions within Mexico continue to weigh on confidence; and energy price volatility remains a threat. Overall, growth is likely to come in below the IMF’s April reference forecast of 1.6%.

Fiscal position

Mexico’s fiscal position is relatively stable by international standards. Government debt is projected to rise only marginally over the next five years and remain only just over 60% of GDP, suggesting that public finances are broadly sustainable. Externally, the current account deficit is small, which reduces immediate financing pressures. However, Mexico still carries substantial net foreign liabilities, leaving the economy vulnerable to shifts in global investor sentiment or tighter international financial conditions.

Mexico also faces deeper structural challenges. Corruption remains a persistent problem, and measures of competitiveness and innovation remain disappointing. Nevertheless, the economy is relatively open and market-oriented, providing a foundation for future reform.

The Mexican peso is fairly valued on the BigMac PPP measure but overvalued on a GDP-adjusted basis. This makes Mexico less price competitive, implying pressures on export competitiveness.